Draghi Doesn’t Understand How the Bond Markets are Dangerous

This article was first published in the Bruges Group blog, we republish it on UKIP Daily with kind permission.

Would you like to lend to the German government and get paid a grand total of 0.43% a year for 10 years? Or how about lending to the French government and getting 0.73%? Or to the Spanish government at 1.35%? With an annual yield of 1.35% a year, lending to Spain and you are invested for 10 years. Doesn’t sound very good, does it? You won’t get rich at 1.35%.

“JOHN BULL can stand many things but he cannot stand two percent.”

That aphorism, quoted by Walter Bagehot, a 19th-century editor of The Economist, expressed savers’ traditional distaste for very low interest rates.

Who would want to buy bonds at such low rates? Why are the yields so low? And why is it that American 10 year government Treasury bonds yield 2.95%, nearly seven times more than the equivalent German bond? Is America really seven times more risky than Germany?

It’s pretty obvious, even to a lay-person, that something is wrong. How can Spanish government bonds yield half that of America’s, when the American economy is booming and the Spanish economy is at best stable, and, at worst, just being propped up by low interest rates? Many banks in Spain and Italy are pretty much technically insolvent, as is Deutsche Bank. And there has been a slow drip feed of bankruptcies, the last big one being Banco Populaire that got sold for just one Euro.

And similarly, whilst the hunt for taxes is on in Europe – and it has started to tax businesses in any way it can – the US is talking about lowering taxes. This cannot be good for the European economies.

Indeed, by the ECB’s (European Central Bank) own criteria, the bank is itself technically insolvent, and, “If the ECB were to apply its own rules to the banks in Europe that say bail-in, not bail-out, then by its own supervision rules, the ECB is insolvent and should be shut down.”

So why are yields so low?

The simple answer is that there has been one buyer, one buyer so big it is almost impossible to comprehend: 2.4 trillion Euros! That is, 2,400 billion Euros worth of bonds that have been purchased by the ECB under its QE and asset-buying programme.

This has created a massive shortage of government bonds, quite ironic, given all the government borrowing going on. And because many institutions, like pension funds, have to buy a fixed percentage of government bonds, whether they like it or not, for statutory and regulatory reasons, they have to buy, at whatever price the market is.

Some pension funds have followed the 60% equity and 40% bonds rule, but others, most state pensions, made it 80% bonds and 20% equity.

So yields of government bonds in Europe went down and down and down, and prices of bonds went up and up and up. It was a totally artificial market, propped up by one enormous buyer, using printed money.

And now this is going to stop. The ECB has called time on its 2.4 trillion Euro bond buying programme, as.

The Euro has fallen as markets respond to cautious elements in the ECB’s plan to end quantitative easing this year.

What Mario Draghi, President of the European Central Bank, does not realize is that now there might be no bid for all the government debt being issued. Yields on European government bonds might rise massively and prices go into free fall.

As this starts to happen, it will turn into a cascade and a lot of buyers will be left holding enormous losses as they all try to find a small exit at the same time.

Indeed, this could not really happen at a worst time as there are already massive stresses being created in Europe, particularly by the Italian election. Just last week, Italian government bond yields rose in the 2 year section from 0.5% to 2.5% in a couple of hours. Yields going up 500% in a couple of hours is unheard of.

Today, Draghi might have unleashed a torrent that will implode the euro and with it, the entire European edifice.

Brexit might actually not matter so much, because in the next few years, there will be nothing to exit from.

The truth of the matter is that there is far more ‘debt’ (credit) than there is actually money in circulation.

The problem has been exacerbated over the years by ‘fractional reserve’ banking, where banks could ‘lend’ far more money than they actually had.

If you go to a bank for a loan, what happens? You don’t actually get given any money, someone types some figures and increases your account balance, then you have to pay that money back in instalments plus ‘interest’. The money you have been ‘lent’ doesn’t actually exist.

A worldwide economy built on credit (debt) is really not sustainable, because even counting all the money available in circulation, any debt (plus interest) can never really be paid back, because there is not enough money to be able to do so.

If you can’t repay your debts, what happens? Yes, the banks seize all your tangible assets (actual wealth) and then either own them or sell them off. So to sum up, the banks create ‘wealth’ that doesn’t exist, and then when you can’t repay them they seize ownership of ‘wealth’ that actually exists (homes, businesses etc).

The current system is doomed to fail, and it just needs a cleverly orchestrated financial ‘crash’ to be engineered by the globalists, and the whole world will be on its knees.

But what next? The ‘solution’ that will be presented will be a “World Bank” and a single global currency. It will be presented in a blaze of glory, wiping out all existing debts (hurrah!). But then ensuring that EVERYONE is then enslaved as every individual or business becomes beholden to this new World Bank, who monitor all transactions and control the ‘flow’ of money – a truly ‘cashless’ society where “computer says no” if you fall foul and don’t play by the rules.

There will nearly always be more debt than narrow money. If there were ten pounds in circulation all it would take is more than ten pounds of loans and debt would exceed money. The usual story is then to say so the debt is unrepayable. Wrong. Every time a bit of debt is paid the money is available to pay another debt in the same way that any loan spent makes the cash available to relend.

The Italian bond market is the most liquid in the world. Their bonds’ average maturity is three years so they have to refinance 1/3rd of their debt every year, at whatever the prevailing interest rate is. If the Italian Government gets into trouble there, the market is simply too large for the ECB to fix.

“I used to think if there was reincarnation, I wanted to come back as the President or the Pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody.” – James Carville.

Catherine – it’s nice to know that I’m not the only one ranting about this. The recovery since the 2008 financial crisis is totally false, ten years on, banks are insolvent and the most countries in the world are just limping along economically. There never was a recovery, it was an illusion created with printed currency.

Now interest rates are rising and things are starting to look like 2007/08, imagine the effect on such deeply indebted people and economies. The South American countries are already falling apart, Venezuela, Brazil, Argentina and these are just a taste of things to come. People need to wake up and realise that they’ve been lied to on a massive scale. Governments have lied about the economy and immigration, both will be a disaster for us: our governments are evil people indeed.

I’m keen to have this discussion because I fear for the people in my home country, I don’t want to sit here far away and watch them suffer as this disaster unfolds, although it willl be worldwide.

Of course Tony Blair and his evil cohorts will claim it’s all the fault of Brexit and Donald Trump. When it happens, 2008 will seem like a walk in the park.

The recession in 2007/8 initiated by the sale and resale of ‘mortgage backed’ securities, underwritten by Lehmann did not have a significant effect on the eurozone although some continental banks with significant international and ‘investment’ banking arms were affected. The eurozone issue is that which afflicts currency unions between countries which are significant in size but with entirely disparate economies and which causes their inevitable dissolution ; the euro cannot and will not escape this unless the Germans decide that the euro is more important than their own relative prosperity which would be a significant change of stance.

Well yes, seperate issues, but the same really, insolvent banks, financial gerrymandering that doesn’t work. The Euro just doesn’t work, there are so many facets to this. Ultimately, it’ll be us that gets screwed again.

Russia, China and India are the latest to trade amongst themselves without the US dollar, the move from the US dollar is accelerating, soon the US dollar will lose its reserve currency status and won’t be able to service its trillions of debts.

Bonds, stocks, who knows how this will play out, I certainly don’t, it’ll be a mess though.